uploads///Leverage ratio

Comparing Offshore Drillers’ Leverages

By

Updated

Leverage ratio

Offshore drilling (IYE) companies are capital intensive, so looking at their financial leverages is very important.

The debt-to-equity ratio and net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio show these companies’ financial leverages. A higher ratio means higher financial leverage and higher financial risk.

Article continues below advertisement

Positives and negatives of debt

Debt acts as a lever, magnifying both gains and losses. Companies that have high debt in poor times have a greater chance of going bankrupt, but high leverage can also be positive if those companies survive. Debt has a fixed cost, and with an increase in revenue, profits increase by a higher percentage. Also, issuing debt instead of equity doesn’t dilute shares. The cost of debt interest is a tax-deductible expense, which reduces a company’s tax burden.

The offshore drilling environment remains challenging. Most companies expect this situation to continue for the next year or two. It’s better for companies to try to reduce the debt in their total capital structures.

Highly leveraged

Seadrill Partners (SDLP) has the highest debt-to-equity ratio at 265%. This ratio has fallen from 282% in the previous quarter. However, its net debt-to-EBITDA ratio of 11.07x isn’t very alarming and is one of the lowest among its peers.

Noble Corporation (NE) has the highest net-debt-to-EBITDA ratio of 41.9x.

Fewer leverage concerns

Rowan Companies (RDC) has a debt-to-equity ratio of 47%—the lowest among its peers—and a net debt-to-EBITDA ratio of 13.42x. Diamond Offshore Drilling (DO), Transocean (RIG), and Ensco (ESV) have debt-to-equity ratios of 52%, 57%, and 58%, respectively.

Advertisement

More From Market Realist